SAN FRANCISCO (Reuters) - Apple Inc on Monday unveiled a next-generation iPhone with faster Internet access that will run on advanced wireless networks and sell for as low as $199 -- half the current entry-level price.

Shares of Apple, after strong gains in recent months partly driven by anticipation of the new device, fell 2.2 percent after Chief Executive Steve Jobs indicated the company was going after the mass market with the new model.

"It changes the game for all smart-phone makers," Tim Bajarin, head of consultancy Creative Strategies, said of the price and new features.

The new phone also marks a dramatic departure for how Apple will make money in its third major business alongside Macintosh computers and iPod media players.

Wireless network companies will no longer pay Apple part of the subscription fees they get from iPhone users, but instead will subsidize the devices up front to make them cheaper.

"The vast majority of agreements we have reached do not have those follow-on payments, so you can conclude that the vast majority of carriers do provide subsidies for the phone," Tim Cook, Apple's chief operating officer, told Reuters.

Cook declined to comment on how the new arrangement would affect Apple's profit margins, but AT&T Inc, the exclusive U.S. carrier for the iPhone, said the subsidy would hurt its earnings and margins through next year.

"It is still a very profitable business. Now the negative is they announced the elimination of some of the monthly fees," said Shaw Wu, an analyst with American Technology Research. "But I can't really imagine the economics really being too much different."

Improved e-mail features for the iPhone are intended to woo business people, while its ability to run on faster networks is key to Apple's push to gain market share in Europe and Asia.

"It's amazingly zippy," Jobs said, showing off the encore to a device that melds a mobile phone, iPod media player and Web browser, nearly a year after the original went on sale.

The new one, which looks similar to the old one but with glossy black or white plastic in place of a metal back cover, loads Internet pages 2.8 times faster than the original, he said.